Monday, May 02, 2005

Health care and the American automobile

George Will wrote in Townhall Who knew? Speculation about which welfare state will be the first to buckle under the strain of the pension and medical costs of aging populations usually focuses on European nations with declining birth rates and aging populations. Who knew the first to buckle would be General Motors, with Ford not far behind? GM is a car and truck company -- for the 74th consecutive year, the world's largest -- and has revenues greater than Arizona's gross state product. But GM's stock price is down 45 percent since a year ago; its market capitalization is smaller than Harley Davidson's. This is partly because GM is a welfare state.

In 2003 GM's pension fund needed an infusion from the largest corporate debt offering in history. And the cost of providing health coverage for 1.1 million GM workers, retirees and dependents is estimated to be $5.6 billion this year. Their coverage is enviable -- at most, small co-payments for visits to doctors and for pharmaceuticals, but no deductibles or monthly premiums. GM says health expenditures -- $1,525 per car produced; there is more health care than steel in a GM vehicle's price tag -- are one of the main reasons it lost $1.1 billion in the first quarter of 2005. Ford's profits fell 38 percent, and although Ford had forecast 2005 profits of $1.4 billion to $1.7 billion, it now probably will have a year's loss of $100 million to $200 million. All this while Toyota's sales are up 23 percent this year and Americans are buying cars and light trucks at a rate that would produce 2005 sales almost equal to the record of 17.4 million in 2000.

GM says its health care burdens, negotiated with the United Auto Workers, put it at a $5 billion disadvantage against Toyota in the United States because Japan's government, not Japanese employers, provides almost all health care in Japan. This reasoning could produce a push by much of corporate America for the federal government to assume more health care costs. This would be done in the name of ``leveling the playing field" to produce competitive ``fairness."

But remember: Employer-provided health insurance is employee compensation. It became important during the Second World War when there were wage controls and a shortage of workers. Because wages could not be bid up, companies competed for workers by offering the untaxed benefit of health care. If GM's $5.6 billion were given not as untaxed workers' compensation in the form of health care, but as taxable cash compensation of equal after-tax value, it would cost GM substantially more than $5.6 billion. Which means that soon -- GM's UAW contract is up in 2007 -- GM's workers may have to give back a value of at least $1,500 a year.

PGL blogged George Will double counts one element of employee compensation by saying GM and Ford have additional costs related to health care coverage. Does Will understand that firms and workers negotiate on the overall compensation package that includes both wages and fringe benefits? Maybe one can argue that GM and Ford management made a bad deal with the UAW on the compensation package as Mark Kleiman did, but Will’s column makes no more sense to me than it does to Jesse Taylor.

Where did George Will double count one element of employee compensation? He knows they negotiated an overall compensation package that includes both wages and fringe benefits, but with at most, small co-payments for visits to doctors and for pharmaceuticals, but no deductibles or monthly premiums they gave away a fringe benefit that they have no control over, and it may force them into bankrupcy.

Jesse Taylor blogged Universal health care will solve the expenditure shortfall GM says it experiences in comparison to Japanese auto producers (or even in experience to insurgent Korean manufacturers, who also - surprise! - have a version of national health insurance). It's up to GM to solve the rest of it.

It might level the playing field, but universal health care would require huge increases in taxes for the taxpayers to provide health care to everyone, and even if that was done, the greedy unions would probably say now that the government is paying for health care, GM must provide some other fringe benefit to replace it.


PGL said...

It is true that Will later noted the term total compensation, but he played the old leftie-loonie toon trick of looking at one element of this and not the rest. Let's suppose you worked for company A getting $30 an hour in wages with no fringes, while I worked for company B getting $20 an hour plus fringes worth $10 an hour. B is not paying more for me than A does. Right? Had a liberal written what Will did - I would have made the same comment. I bet you would have too.

PGL said...

I added to my original post something where you correct comment regarding taxes sharpened what my issue with Will's oped really was. Thanks for the post as I did need to express the line of thought more clearly.

Don Singleton said...

The part he was looking at was what was causing them the grief, for two reasons. (1) It was uncontrolable. Since the employees had little or no copay, there was no incentive for them not to incur health care costs needlessly. And (2) It was a cost that the competition (cars from Japan) did not have to pay.

Don Singleton said...

PGL updated his post to say Footnote to a sidenote: Don Singleton says I may have been unfair to George Will. Don also correctly notes that providing universal health care coverage would require tax increases. Let me pose the following amended version of why I think Mr. Will is totally off the mark here. U.S. company A and Japanese company B compete in the same sector. B hires workers at $20 an hour and provides no fringe benefits. A hires workers at $15 an hour paying them a fringe benefit package that includes non-health care items worth $5 an hour. So far – we have similar compensation packages in terms of costs to the firm. Let’s add health care costs in the following way: A provides health care costs worth $5 an hour, but B does not as workers are covered by the government. Now Don’s point is that the Japanese government is providing for this health care by imposing taxes. So if B has to pay $5 per employee-hour in taxes than A does not, what is the difference? Yes, AB and Kash will likely note that health care costs more in the U.S. than in other nations.

(1)The Japanese government is subsidizing the Japanese Auto Industry, and whether Japanese consumers get poorer quality health services, or whether they pay more for their cars to the Japanese Auto Industry can afford to undersell on cars imported here, GM is still at a disadvantage.

(2)As PGL said, health care costs are higher here because we are too litigious

<3)It was uncontrolable. Since the employees had little or no copay, there was no incentive for them not to incur health care costs needlessly.